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A7X Corp. just paid a dividend of $1.45 per share. The dividends are expected to grow...

A7X Corp. just paid a dividend of $1.45 per share. The dividends are expected to grow at 30 percent for the next 8 years and then level off to a growth rate of 8 percent indefinitely.

If the required return is 12 percent, what is the price of the stock today?

  • $156.07

  • $128.98

  • $149.95

  • $153.01

  • $2.05

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Expert Solution

Required rate= 12.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 1.45 30.00% 1.885 1.885 1.12 1.683
2 1.885 30.00% 2.4505 2.4505 1.2544 1.95352
3 2.4505 30.00% 3.18565 3.18565 1.404928 2.26748
4 3.18565 30.00% 4.141345 4.141345 1.57351936 2.6319
5 4.141345 30.00% 5.3837485 5.3837485 1.762341683 3.05488
6 5.3837485 30.00% 6.99887305 6.99887305 1.973822685 3.55
7 6.99887305 30.00% 9.098534965 9.098534965 2.210681407 4.11572
8 9.098534965 30.00% 11.82809545 319.359 331.1870955 2.475963176 133.76091
Long term growth rate (given)= 8.00% Value of Stock = Sum of discounted value = 153.01
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 8 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

jeff jeffy answered 10 months ago
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